BoE raises base rate to 3%: what this means for mortgages, debt and savings

Alice Haine, Personal Finance Analyst at Bestinvest, the DIY investing and coaching service, says the 0.75% hike in the benchmark lending rate marks the eighth increase in a row with the base rate now at the highest level since November 2008. This is the largest single increase since 1989 if you exclude Black Wednesday on September 16, 1992, when rates were briefly raised to 12% from 10%.

“The Monetary Policy Committee’s 7-2 vote in favour of the 0.75% hike – the biggest jump in more than 30 years – shows the Bank is still very serious about easing inflation, currently at a 40-year-high of 10.1%, back towards its target of 2%.

“Increasing interest rates when the economy is already in a recession is not a typical course of action for a central bank, but these are exceptional times and the BoE had to act to tame double-digit inflation, which is constraining expenditure for companies and consumers alike.

“The weeks since the Monetary Policy Committee last met have been marred by financial and political turmoil following former Chancellor Kwasi Kwarteng’s controversial mini budget, which caused mayhem in the bond markets, exposing vulnerabilities in the pension sector and sending borrowing expectations soaring.

“The turbulence may have eased since Chancellor Jeremey Hunt reversed most of the mini-budget's measures, Liz Truss resigned and Rishi Sunak took over as Prime Minister, but inflation is still high – largely driven by global challenges such as Putin’s war in Ukraine.

“Higher interest rates will pile more pressure on household finances already battered by the toxic mix of high prices, falling real incomes, soaring borrowing costs and the effects of a recession.

“Expectations of higher taxes and spending cuts to come when Hunt unveils his budget on November 17 means the hit to the consumer wallet will continue as Britain tightens its belt to plug the shortfall in public finances, high prices get even higher and the recession deepens.

“With the BoE expecting the headline rate of inflation to peak at around 11% in the fourth quarter of this year, the economy set to contract further next year and unemployment to rise - households should stick to a tight budget from now and boost savings where they can to build a robust buffer against rising costs and the added threat of job loss.”

“Naturally, a 75 basis point increase in the base rate is another blow for mortgageholders who are already grappling with the reality of higher borrowing costs following more than a decade of ultra-low interest rates.

“Mortgage rates jumped to a 14-year high of 6.65%* for an average two-year fixed product last month with lenders pulling hundreds of home loans as they took stock of the volatile borrowing environment in the wake of Kwarteng’s mini budget.

“But even without the mini budget, interest rates were already on the rise as the BoE strived to contain runaway inflation dampening affordability in the process. It was no surprise then to see flat mortgage borrowing and falling mortgage approvals in September as buyers either downgraded their aspirations, failed to secure finance or abandoned the market altogether.

“While those locked into fixed-rate deals are protected for now, higher interest rates mean they face a huge jump when they come to remortgage. Those with a variable rate mortgage, however, will feel the heat of a base rate rise faster. While a tracker mortgage, directly linked to the BoE’s base rate, will have the increase applied instantly and in full, those on a standard variable rate (SVR) or discounted SVR will have to see how much of the increase their lender will pass on.

“What all mortgage borrowers must do now is carefully assess the best type of product for their risk profile. Fixed-rate deals might seem less appealing in the current climate when compared to tracker mortgages, which follow the BoE’s base rate with a set percentage on top, such as 1%. But with interest rates expected to peak at 5% next year before falling back again, it means tracker repayments would almost certainly go up in the short term – though they may also come down in the longer term.

“Remember, all of this is set against a downturn in the property market with double-digit price falls potentially on the cards - something that would negatively impact a borrower’s loan-to-value band. With so much uncertainty ahead, buyers should seek the help of an independent mortgage broker to ensure they secure the best product for their unique financial situation.”

"A higher base rate is not good news for those looking to take on debt as loans, credit cards and overdrafts will only get more expensive. While anyone with an existing fixed-rate personal loan or car loan can relax as the terms of their loan have already been agreed, new borrowers will find the cost of credit higher when they compare products.

“One comforting factor is that consumers are not borrowing at such a rapid pace – instead reining in their spending and building up savings as they batten down the hatches in the face of multiple challenges. Consumers borrowed an additional £0.7 billion in credit in September - markedly down on the £1.2bn in extra borrowing the month before - with many turning their backs on expensive credit cards.

“However, high inflation and higher borrowing costs will be a challenge in the run-up to Christmas – traditionally a high-spending time – as consumers will have less disposable income to splash out on presents and entertainment. And with the country already in recession, job losses could see more people forced to turn to credit to pay the bills.

“Living within your means will be key for those that want their finances to survive the next few months, so households that already find themselves in deep water should scrutinise their budgets carefully and seek the help of a free debt counsellor who can guide them on the next steps.”

“A 0.75% rise in the base rate is great news for savers, with many already taking advantage of better deals in the market. Households deposited an additional £8.1 billion with banks and building societies in September - the most since June 2021 - cashing in on higher rates that now top 2.5% for an easy access account and 5% for a fixed rate account and bolstering their reserves in the face of difficult times ahead.

“Savers that don’t switch their money to a high-interest account are seriously missing out, particularly when you consider the real return on their money is still deeply negative as inflation at 10.1% erodes the purchasing power of that cash.

“While saving money in an easy-access account makes sense for an emergency pot of money to prepare finances for any sudden expenses, it does not make sense for larger sums. Those with longer-term savings goals – more than five years and ideally at least 10 – should consider investing their money in the markets. While higher returns from the markets can never be guaranteed, a long-term approach allows a diversified investment portfolio to absorb the highs as well as the lows and potentially deliver inflation-beating growth.”